Deep Dive: Buying a Business

01 / Why buy instead of start

The going-concern argument

Buying an operating business is purchasing a going concern: customers, cash flow, systems, employees, brand, and history — all already working. Starting from scratch buys none of that; you pay in time and risk instead of money.

The catch is embedded in the table: when you buy, you buy the seller's history too. Every business for sale has problems — the question is never whether they exist, but how big they are, whether they are fixable, and whether the price accounts for them. The entire skill of buying a business is answering those three questions before you sign.

02 / What good looks like

Characteristics of a good business

Before searching, know what "good" looks like. Great acquisition candidates share a recognizable profile — score a business against these, and you have a filter rather than a feeling.

Earnings quality

• Stable, documented earnings — three to five years of consistent or growing profit, verified against tax returns, not just internal books
• Defensible margins — gross margins that clear the industry norm, so there is room to absorb costs
• Earnings that survive the owner's departure — the SDE or EBITDA the seller quotes should not depend on the seller working 70-hour weeks

Customer and revenue structure

• Diversified customers — no single customer above roughly 10–15% of revenue; losing one account should hurt, not kill
• Recurring revenue — contracts, retainers, subscriptions; predictability is what banks lend against
• Multiple revenue streams — not one product, one channel, one buyer type

Operations

• A team that runs without the owner — the single strongest signal of a buyable business; a business that stops when the owner leaves is not an asset yet
• Documented systems — written procedures, a real CRM, a business that runs on process rather than memory
• Modern, transferable assets — equipment in working condition, owned intellectual property, a lease with years left

Market position

• A defensible niche — licenses, certifications, long-term contracts, hard-to-replicate relationships
• Growth, not just survival — the industry should be flat or growing; buying into a declining market is buying a countdown
• Clean reputation — no litigation overhang, no regulatory problems

The seller

• A motivated, honest seller — the reason for leaving should make sense (retirement, health, a new venture) and be verifiable
• A seller willing to help you take over — transition support is part of the deal; an unwilling seller is a red flag no price fixes

03 / Finding businesses to buy

Where the good deals live

The best acquisitions rarely appear in public listings. The sourcing landscape, roughly in order of how serious buyers operate:

• Business brokers and M&A advisors. The professional market: most sellable businesses above Main Street size are sold through brokers with confidential listings. A broker's inventory is the buyer's version of the off-market network — and a good broker qualifies buyers, which means the good deals are shown to serious buyers first
• Direct outreach (the search-fund model). Approaching owners directly — "have you ever thought about selling?" — is how many of the best deals are found. Most owners have not listed; some are ready to talk. This requires discipline, a target industry, and a script
• Industry networks and advisors. CPAs, attorneys, bankers, and industry association members hear about owners planning to retire years before a listing appears. Relationships are the currency
• Public listings and marketplaces. The visible surface of the market — useful for screening prices and activity, but competition is heaviest there and the inventory skews toward businesses that could not sell through a confidential process
• Bank and SBA inventory. Lenders occasionally have troubled or foreclosed businesses — distressed situations that can be bought cheaply but come with the reasons they failed

04 / Screening: teaser, CIM, visit

The layers of disclosure

When a broker or seller shares information, it comes in layers — and each layer is a filter:

• The teaser — a one-page blind summary: industry, size, revenue range, and a few highlights. No company name. This tells you whether to raise your hand
• The CIM (Confidential Information Memorandum) — the full offering document: operations, financials, growth story, management, facility, and the opportunity. You receive it only after signing a non-disclosure agreement
• The visit and management meetings — the live business, the facility, the team, and the chance to ask the seller questions directly

How to read a CIM. Remember the document's purpose: it is the seller's sales brochure. Read it for what it omits as much as what it states. The CIM will show revenue and profit history — but the recast (the normalized SDE or EBITDA) is the number that matters, and you must verify its adjustments line by line. Ask: which add-backs are real (one-time costs), and which are recurring expenses dressed up as one-time? That distinction is where sellers stretch the truth — and it is the difference between paying for earnings that exist and earnings that don't.

05 / The buyer's lens on value

What a business is really worth

The value of a business is calculated with a disciplined framework — the same one appraisers use, explained in full in our valuation deep dive. The buyer's job is to use that framework as a negotiating tool, not a statement of faith:

• Owner-operated businesses typically trade around 2x–4x SDE; professionally managed businesses around 3x–7x EBITDA — the multiple reflects growth, risk, and owner independence
• You are buying cash flow. Model the deal the way a lender does: after debt service and your own fair salary, what cash flow remains? That residual — not the SDE multiple — is what determines what you can afford to pay
• The seller's recast is a claim, not a fact. Rebuild the earnings yourself from the raw tax returns and financial statements, with your accountant. Every add-back must survive your scrutiny
• Working capital is part of the price. Most buyers forget that the business needs cash on hand to operate after closing — receivables, inventory, payroll. The deal should define what working capital comes with the sale, or you will fund it yourself in week one

06 / Due diligence

The buyer's job — verifying everything

Due diligence is the process of verifying everything the seller represented before you commit. It is not optional, and it is not the lawyer's job alone — it is yours, organized by professionals.

Financial diligence (the most important)

• Verify revenue against tax returns, bank statements, and the accounting system — do the three agree?
• Rebuild the recast line by line; challenge every add-back
• Check gross margin stability and the trend of the trailing 12 months — the most predictive period
• Review the balance sheet: receivables collectible, inventory real, liabilities complete — including off-balance-sheet items like leases and guarantees
• Understand the working capital cycle — how much cash the business needs to operate

Commercial diligence

• Customer concentration: list the top customers and their contract status; the top 20% of customers usually drive the majority of revenue
• Recurring vs. one-time revenue: what percentage is contractually committed?
• Supplier dependence and pricing risk; the top suppliers' terms
• The sales pipeline and marketing engine — driven by systems or by the seller's relationships?

Operational diligence

• The team: org chart, key employees, compensation, and their commitment to stay — transition bonuses earn their keep here
• Systems and documentation: what survives if the owner leaves tomorrow?
• Facilities, equipment condition, leases — assignment rights; the lease must be assignable or renegotiable
• Technology: is the customer data, the website, and the IP actually owned by the company?

Legal and human diligence

• Entity and ownership records; litigation, claims, liens; contract assignability and change-of-control clauses; IP ownership and regulatory compliance
• Employment agreements, non-competes, handbooks — and the practical question: will the key people stay? A 90-day transition overlap with the seller is a standard ask, not a luxury

The seller's story. Verify the "why are you selling": retirement should be visible in the seller's age and the absence of succession; a strategic exit should be consistent with the business's position. If the seller is selling because the market is about to turn — a lost contract, a new competitor, a regulatory change — diligence is where that should surface. Ask directly, then verify what you can.

07 / Financing the purchase

Bank money, seller money, your money

Few buyers pay all cash; most acquisitions are built from three sources — and the skill is assembling them so the business can carry the debt.

Bank financing: the SBA 7(a) — the workhorse

• Loan size: up to $5 million, guaranteed by the SBA, so banks lend where they otherwise would not
• Down payment: typically 10% of the purchase price, plus closing costs — the buyer's equity stake
• Terms: up to 10 years for working capital and equipment, up to 25 years for real estate
• Rates: floating, capped by SBA rules — prime plus a spread
• What banks underwrite: the business's cash flow, the buyer's credit and industry experience, and the debt service coverage ratio (DSCR) — cash flow available to service the debt divided by the annual payment. Lenders typically want 1.15x–1.25x or better

DSCR example. A $1.5 million purchase financed with $1.2 million of SBA debt at a 10-year term: the annual payment is roughly $190,000. If the business produces $350,000 of SDE and the buyer takes a $90,000 market salary, the cash flow available for debt is $260,000 — a DSCR of about 1.4x, comfortably inside lender requirements. If the same business only produced $220,000 of SDE, the DSCR falls below 1.0x, and the deal does not finance at that price — the price must come down, or the buyer must put in more equity.

Seller financing: the note that bridges the gap

• Structure: a promissory note, usually 3–7 years, amortizing or interest-only, at market rates — typically prime-plus or a fixed rate in the mid-to-high single digits
• Subordination: the seller's note almost always sits behind the bank — if the business fails, the bank gets paid first. That is exactly why sellers demand a higher rate or a larger down payment in return
• What it signals: a seller willing to finance is a seller who believes the business will generate the cash to pay them — the strongest possible alignment of incentives

The combined structure — how deals actually get done

On the $1.5 million example: $1.2M SBA (80%) + $150K seller note (10%) + $150K buyer cash (10%). The buyer's all-in cash, including closing costs and working capital, typically lands at 15–25% of the purchase price — plan for that, not just the down payment.

Other tools: conventional bank loans for stronger borrowers with more equity, earn-outs (part of the price paid from future performance — a way to bridge a gap in seller confidence and buyer caution), and — rarely, for buyers with a track record — full seller financing with no bank. Be skeptical of "no money down" claims: the lender and the seller both want the buyer's cash in the game, and any structure that lets a buyer in with zero equity is usually priced to compensate for that risk.

08 / The LOI

The letter of intent — the offer in writing

Once you have picked a target, done initial diligence, and settled on a price, you make an offer in writing: the letter of intent (LOI). The LOI is the term sheet of the deal — the skeleton that the lawyers later flesh out into the purchase agreement.

What the LOI states:

• Price and structure — the number, and whether the deal is an asset or stock purchase
• What is included — assets, inventory, working capital, real estate (or not)
• Deposit / earnest money — often 1–5% of the price, held in escrow, refundable if diligence fails
• Due diligence period — typically 30–90 days of exclusive access
• Exclusivity — the seller agrees not to talk to other buyers while you diligence
• Timeline and contingencies — financing, lease assignment, key-employee retention
• Seller financing terms, if any

Binding vs. non-binding. The LOI's price and structure terms are usually non-binding — they are the offer, not the contract. But its procedural terms are binding: confidentiality, exclusivity, deposit handling, and often a standstill. Everything in the LOI is negotiable, and nothing in it should be signed without your attorney reading it first — the LOI sets the frame for the whole negotiation, and changing course later is expensive.

09 / The purchase agreement

Asset vs. stock — and the clauses that matter

The LOI becomes the purchase agreement — the binding contract. For most private business acquisitions, the buyer should expect an asset purchase agreement (APA): the buyer purchases the assets, and assumes only the specified liabilities, of the business — rather than the ownership interest in the company.

Why buyers prefer asset purchases:

• No inherited baggage — you buy what you choose; unknown liabilities, old lawsuits, and unpaid taxes stay with the seller's entity
• A stepped-up tax basis — you allocate the purchase price across the assets (equipment, inventory, goodwill) and depreciate or amortize them, reducing future taxes; the allocation is filed with the IRS on Form 8594
• Cleaner contracts — you re-sign employees, customers, and suppliers on your terms

Why sellers resist: the seller is taxed on each asset sold (including ordinary income on inventory and equipment, not just capital gains on goodwill), and the seller's entity is left holding the liabilities. This is the central structural tug-of-war of every small-business deal — and the resolution (price, allocation, indemnification) is negotiated, usually with a price adjustment in exchange for structure.

The key clauses a buyer must understand:

• Purchase price and allocation — what you pay, and how it is split across assets; it drives your tax basis and the seller's tax bill
• Representations and warranties — the seller's legal promises about the business. The survival period (how long the promises last, typically 12–24 months) and the cap on seller liability matter as much as the promises themselves
• Indemnification — if a representation proves false, the seller compensates you; the enforcement mechanism is usually an escrow or holdback of 5–10% of the price held for 12–18 months
• Non-compete — the seller cannot compete with or solicit your customers and employees for a defined period and territory
• Transition services — the seller's consulting period, often 30–90 days paid, plus a longer tail of availability
• Working capital adjustment — the price assumed a working capital level; closing adjustments true it up to actual
• Closing conditions — financing, lease assignment, licenses, key-employee agreements — the checklist that must clear before the money moves

10 / Your team

Who should be on it

Buying a business is the largest financial transaction most people ever make, executed against a seller's professionals. Your side needs its own:

• An M&A attorney — not a generalist. The purchase agreement, reps and warranties, indemnification, and asset allocation are where deals are won and lost in the fine print
• A CPA with deal experience — to verify the recast from the raw books, model the deal's tax outcomes, and structure the acquisition entity
• A commercial lender / SBA specialist — engaged before the LOI, so the financing structure and your qualification are settled while you still have negotiating room
• A business broker or buyer's advisor — most brokers represent sellers, but buyer-side advisors exist: they source deals, coordinate diligence, and negotiate
• An industry mentor or operator — someone who has run a business in your target industry; they will see risks in the CIM that no generalist will
• An insurance broker — for the coverage review (liability, key-person, property) that lenders will demand anyway

11 / Common buyer mistakes

What separates buyers who close from buyers who suffer

• ✓Falling in love. The deal must work as an investment; "I can fix it" is the most expensive sentence in acquisition. If the numbers do not work at the asking price, walk
• ✓Trusting the recast. The seller's EBITDA is a sales document until you verify it. Rebuild it yourself
• ✓Skipping diligence to save time or money. The seller's problems become yours at closing, permanently
• ✓Ignoring working capital. Forgetting that the business needs cash to run after closing is how buyers run out of money in month three
• ✓Paying for the owner. If the earnings depend on the seller's relationships and 60-hour weeks, you are buying a job and paying an asset price — unless the transition plan and the price both reflect it
• ✓No transition plan. The takeover is where acquisitions fail: no overlap, no customer calls, no key-employee retention, no 100-day plan. The deal is not done at closing; it is done when the business runs without you or the seller
• ✓Overleveraging. A bank will happily lend you the maximum; the maximum may leave you no room for a bad quarter. Structure debt so the business survives a downturn
• ✓Going alone. No attorney, no CPA, no advisor — negotiating against the seller's team with no one covering your flank

12 / FAQ

Buying a business FAQ

How much cash do I need to buy a business?

Plan for 15–25% of the purchase price all-in: the 10% down payment, closing costs, professional fees, and initial working capital. On a $1 million business, budget $150,000–$250,000 of cash, not $100,000.

Can I buy a business with no money down?

Almost never — and you should be suspicious of anyone selling that fantasy. Banks require 10% buyer equity, and sellers want to see your cash in the deal because it is what keeps you committed. Full seller financing exists but is rare, and it is usually priced for the risk.

What is a fair multiple to pay?

Owner-operated businesses typically trade around 2x–4x SDE; professionally managed ones around 3x–7x EBITDA, with the multiple driven by growth, risk, and owner independence. But the multiple is a starting point — the real test is whether the deal's cash flow services the debt and pays you a fair salary with room left over.

How long does due diligence take?

30–90 days for a small to mid-sized acquisition, running alongside financing and legal work. Faster is a warning sign, not a virtue.

What is an LOI vs. a purchase agreement?

The LOI is the non-binding term sheet — price, structure, timeline, exclusivity. The purchase agreement is the binding contract that replaces it. The LOI sets the frame of the negotiation; the purchase agreement is the final deal.

Do I need a lawyer to buy a business?

Yes — specifically an attorney who does M&A work. The reps, warranties, indemnification, and asset allocation clauses are where a generic attorney's template can cost you more than the fee.

Can the business pay for itself?

Yes — that is the premise of acquisition financing. The business's cash flow services the debt (that is what the DSCR measures). But "the business pays for itself" only works if the cash flow is real and you take a realistic salary. The model must be built before the offer, not believed after.

What is seller financing?

The seller loans you part of the purchase price — a promissory note, typically 10–30% of the price, subordinate to the bank, at market rates. It bridges the gap the bank will not cover, and a seller willing to finance has real confidence in the business.

What's the difference between an asset purchase and a stock purchase?

In an asset purchase you buy the assets and assume only the listed liabilities, with a stepped-up tax basis and no inherited baggage. In a stock purchase you buy the ownership interest — cleaner transfer, but you inherit everything, including hidden liabilities. Buyers usually prefer asset deals; sellers usually prefer stock deals; the price and structure are negotiated.

How do I know the financials are real?

Cross-check the tax returns against bank statements and the accounting system; rebuild the recast yourself; verify the biggest customers and contracts directly. If the three sources do not agree, the problem is not the paperwork — it is the business.

Should I buy a business or start one?

Buy if you want cash flow, an existing customer base, and proven systems, and can afford the price. Start if you have a strong concept, time, and tolerance for a long runway. The decision is about what you are buying: a going concern or a vision.

What happens if the seller's customers leave after closing?

That risk is exactly why the transition plan exists: seller overlap, customer introduction calls, and key-account handoffs — plus, in the purchase agreement, transition services and a non-compete. The deals that fail post-closing are the ones that skipped the transition, not the ones that priced it in.

13 / Next steps

Building the search

The journey from "I want to buy a business" to closing has a shape: define your criteria, build your team, source aggressively, screen ruthlessly, diligence thoroughly, and structure carefully. This guide gives you the map; the execution is a process of months, not weeks.

Diversified Business Advisors works with buyers across New England — from sourcing and screening to diligence and negotiation — alongside its valuation, exit planning, and brokerage practices. Whether you are buying your first business or your fifth, a conversation costs nothing and tells you where the market and your criteria meet.